News / Ocean carriers must do their homework before sitting down for contract negotiations

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After five consecutive quarters of contract rate increases it is even more important that shippers do their homework before sitting down with freight carriers, says Chas Deller a consultant with Drewry Supply Chain Advisors.

In a webinar presentation today, the industry veteran offered an insight into bid negotiating with ocean and air freight carriers.

A recent survey of BCOs [beneficial cargo owners] on the transpacific trade found 49% were expecting an increase in Asia to US contract rates this year.

There were five golden rules that BCOs would do well to follow, said Mr Deller, beginning with the timing of the tender which should include starting by allowing as much time as possible to understand the market services and rate levels, and should preferably avoid negotiating the bid during peak season.

Secondly, although all global volume should be included as leverage in the tender, Mr Deller recommended that BCOs should not commit more than 70% of their forecasted volume to a specific trade as a space requirement.

A third golden rule was to fix base rates and surcharges for a 12-month period and not allow the carrier to insert ‘subject to GRI’ or ‘subject to PSS (peak season surcharge)’ clauses into the agreement.

And on the subject of a bunker surcharge, this should be reviewed on a quarterly rather than monthly basis, but if advantageous included in the base rate.

Ideally, an agreement should be concluded with a primary and secondary carrier in each of the three alliances with the support of a ‘niche’ carrier where possible. This, he suggested, was necessary to mitigate the impact of liner consolidation.

“Typically, when there is less choice, you pay more,” Mr Deller said.

The fifth golden rule was to build adequate ‘free time’ (demurrage and detention) into the deal.

“Nobody is going to thank you if you chase the dollar and not the value by saving $200 per container to see it given back and more in rent and detention charges,” said Mr Deller.

This rule would also apply to prices that do or do not guarantee shipment – the more expensive so-called VIP ‘space guarantee’ contracts now in existence were an example.

He said that a target of 45 days – from start to signing of contract – should be achievable and recommended using the BIMCO SERVICECON standard service contract for liner trades, which also has a performance clause facility, rather than the typical carrier contracts which are “extremely complex and difficult to understand”.

Notwithstanding Mr Deller’s procurement background, he also offered advice to providers, gleaned from his years of sitting on the other side of the negotiating table.

He rued the “decline in standards in carrier competence in the past few years”, which he said was leading to “elementary errors” in bid documentation and argued that NVOCCs tended to be more thorough in their processes and material.

Providers must “show a desire to be part of the customers’ supply chain”, said Mr Deller and endeavour to understand the business and “build a solid relationship”.

They should also be prepared to show proof of performance criteria on an ongoing basis, be pro-active with their pricing and most importantly “be a difference maker”.